‘Greedflation’ loosens its grip on food retailers
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Aimee Donnellan
LONDON, May 24 (Reuters Breakingviews) -After being suffocated by inflation since the pandemic, grocers are starting to breathe a little easier. Big food manufacturers like Kraft Heinz KHC.O and Unilever ULVR.L are ratcheting down the price rises they have been inflicting onto supermarket chains. If food retailers can convince cash-strapped customers to skimp less and pay more, their profit margins will finally start growing.
After causing controversy in the United States, “greedflation” – accusations that some companies are taking advantage of high inflation to ramp up prices – is big news in Europe. The European Central Bank’s President Christine Lagarde recently hinted at the issue, when she said some firms are boosting profit margins due to a “mismatch between supply and demand”. France’s finance minister is also seeking to tackle the inflated cost of food. Last week, the country’s food retailers opened negotiations on prices with manufacturers like Coca-Cola KO.N and Unilever as food inflation surged to over 15% in March.
Food inflation is still stubbornly high. In the UK in April it was above 19%, according to the Office for National Statistics. But politicians and consumer groups blame companies for “greedflation” – from commodity producers to manufacturers – but there is one clear loser from the practice: grocers. Supermarkets feel the pinch from customers who defect to discounters like Germany’s Lidl and Aldi. Since the pandemic, these budget chains have rapidly expanded their market share across Europe, according to data from Kantar.
And supermarkets are also squeezed by suppliers like Unilever, Nestlé NESN.S and Kraft Heinz that have been hiking prices by 13% or more. The companies say that’s barely enough to cover the rising costs of raw materials and employees. Their critics argue that they are “greedflating” their profits.
With no real pricing power, chains like Walmart WMT.N, Kroger KR.N and Carrefour CARR.PA have all suffered declines in their EBITDA margins from 2021 to 2022. Frans Muller, chief executive of Stop & Shop owner Ahold Delhaize AD.AS, is calling on suppliers to bring down prices now that commodity costs are falling, and inflation is waning. He has reason to be hopeful. In the first three months of the year, Unilever increased prices by over 10%, but that was lower than the price hikes it pushed through in previous quarters. Meanwhile, in February Kraft Heinz paused price rises, saying consumers are “paying more attention to the price tag”.
Food manufacturers can certainly do more. Although their margins are also under pressure, they operate with EBITDA margins as high as 27%, while supermarkets have to scrape by on around 5%-8%. But less pressure from suppliers won’t be enough to revive grocers’ fortunes. They need to convince price-wary customers that the worst of the pain is over and they can spend more on their shopping trips. Until that happens, grocers’ margins will remain in inflation’s steely grip.
Follow @aimeedonnellan on Twitter
CONTEXT NEWS
British consumer price inflation fell to 8.7% in April from March's 10.1%, figures from the Office for National Statistics showed on May 24. Meanwhile, food inflation remained high at 19.1% in April versus 19.2% in March.
France’s food industry has agreed to reopen price negotiations with retailers early, Finance Minister Bruno Le Maire said on May 17, after he put pressure on big food companies to lower prices. Despite declines in prices of raw materials on global markets, French food inflation has surged to over 15% in recent months after food companies and retailers agreed to an average 10% increase in annual price negotiations in March.
Unilever raised prices by 10.7% in the first quarter of 2023, which was lower than in recent quarters. Nestlé on April 25 reported slightly better-than-expected first-quarter sales, as the world’s biggest packaged food company increased prices to offset weak sales volumes.
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Editing by Francesco Guerrera, Oliver Taslic and Pranav Kiran
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